Thursday, July 14, 2016

We are pleased to inform you that our Hidden Gem stock of August 2015 - Chemfab Alkalies Ltd (BSE Code: 506894, NSE Code: CHEMFALKAL) which was released on 6th Sept'15 has given absolute returns of 75% to our Hidden Gems members within period of 1 year. Our team suggested Buy on Chemfab Alkalies Ltd at average price of Rs. 90.80 on 06 Sept'15 with a target price of Rs. 170. We are glad to inform our readers that stock is near to our target price in matter of 10 months, Chemfab Alkalies stock made its 52 week high of Rs. 164 today and currently trading at Rs.159 giving absolute returns of 75% to our Hidden Gems members in period of 10 months. In Mar'16 quarter, net profit of Chemfab Alkalis rose 162.59% to Rs 3.65 crore as against Rs 1.39 crore during the previous quarter ended March 2015. Sales rose 14.18% to Rs 29.23 crore in the quarter ended March 2016 as against Rs 25.60 crore during the previous quarter ended March 2015.For the full year, net profit declined 15.35% to Rs 8.66 crore in the year ended March 2016 as against Rs 10.23 crore during the previous year ended March 2015. Sales declined 8.01% to Rs 101.05 crore in the year ended March 2016 as against Rs 109.85 crore during the previous year ended March 2015. We suggest our members to continue to hold the stock for long term.Below is the summary of Chemfab Alkalies Ltd shared by our team under Hidden Gem stock of August'15 released on 06th September 2015.Note: This report is shared only for the purpose of information and not an investment advice. Kindly carry out your own due diligence in case of investment in Chemfab Alkalies.

Company Background:

A Chennai based company Chemfab
Alkalis Ltd (CAL) was incorporated in 1983. The company was promoted by M/s
Titanium Equipment and Anode Manufacturing Company Limited. CAL manufactures
chemicals for industrial applications. In June 2009, chlorates division has
been closed permanently due to frequent power problems and labor unrest.
Company established India’s first Membrane Cell Caustic Soda Plant and
commenced production from July, 1985.

CAL is the first Indian
company to use the power saving ion exchange membrane cell technology to
manufacture caustic soda. Chemfab Alkalis (CAL) also produces Sodium
Hypochlorite and sodium Chlorate and the bye products of caustic soda like
chlorine and hydrozen. Chemfab Chlorates, a group company was amalgamated with
Chemfab Alkalies Ltd during the year 2001-02 on the approval from High court of
Madras.

The company has also
takenover the management of Salt fields by the way of backward integration. The
salt fields are situated at marakanam 25 kms from the factory of the company.
Chemfab Alkalis was selected for the 1988 award of excellence in Environment
Preservation and Pollution Control by the Federation of Indian Chambers of
Commerce and Industry for its membrane cell technology which totally eliminated
the use and disposal of mercury.

Products

Caustic Soda Lye in two grades (33% &
48%)

Liquid Chlorine

Hydrogen Gas

Hydrochloric Acid

Sodium Hypochlorite / Bleach Liquor

Barium Sulphate

The above products are completely
free from mercury and are used in food processing industries as well.

The first ever pollutant free caustic soda in
the country was from CAL. The quality of the products matches the requirements
of BIS and meets international specifications.

CAL commenced the operation
with the production capacity of 25 TPD and now operates at 100 TPD. The
features of the plant recently revamped it’s with the latest-state-of-the-art
BiTACtechnology, and looking forward to double its
production capacity to 200 TPD.

Chlor alkali market inIndiahas witnessed healthy growth in recent
years, largely driven by increasing demand from end user industries due to
higher output from the chemicals sector. Chlor alkali market is broadly
categorized into three segments, namely Caustic Soda, Chlorine and Soda Ash.
Caustic Soda finds major application in diverse industries, such as soap &
detergents, pulp & paper and textile processing among others. Chlorine is
produced as a by-product during caustic soda production and is widely used
during PVC manufacturing, drinking water disinfection and pharmaceutical
production. Soda Ash is used mainly during glass, soap & detergent and
silicate production.

With strong growth anticipated in all these end
use industries, the market for chlor alkali inIndiais forecast to grow considerably in
the next five years.

According to India Chlor Alkali Market Forecast
& Opportunities, 2019, the market for chlor alkali inIndiais projected to exhibit a CAGR of
around 7% during 2014-19. The market is expected to witness high penetration
rate in the Western and Northern regions of the country. The market, though
highly fragmented at present, is gradually moving towards consolidation, particularly
with the entry of foreign players and expansion in distribution network of
existing players. Among the three market segments, caustic soda held the
highest revenue share, followed by chlorine and soda ash segments.

Soap & detergent is the main end user industry in
the chlor alkali market, followed by glass, pulp &paper, alumina and other
industries.

Research & Development

The Company has an in-house Research Development Department, where
the main areas of focus are Energy Conservation, Process Upgradation and
Environmental Preservation. The Ministry of Science and Technology, Department
of Scientific and Industrial Research, Government of India, has recognized the
Company’s inhouse R & D facilities, which is valid upto 31st March, 2017.
The Company has a sophisticated Quality Assurance (QA) Laboratory recognized by
DuPont, USA for the analysis of Chlor- Alkali brine.

The Brine from various Chlor- Alkali Industries in India is being
analyzed at CAL-QA Laboratory. The Company continues to take all possible steps
to conserve energy in every area of its operations recognized by DuPont, USA
for the analysis of Chlor- Alkali brine. The Brine from various Chlor- Alkali
Industries in India is being analyzed at CAL-QA Laboratory. The Company
continues to take all possible steps to conserve energy in every area of its
operations.

The company continues to use hydrogen gas instead of conventional
fuel reducing the carbon footprint. The company has also installed solar street
lightings and also the Bio Gas plant for replacing conventional energy sources
by making investment of Rs. 10 lakhs.

2. Recent Developments: (as on 6th Sept'15)

i) Replacement of old plant with
Bipolar BiTAC Electrolysers Plant from CEC, Japan.

In 2014, company introduced a new BiTAC® Electrolysers from CEC, Japan
for the first time in the Country. The new Plant was commissioned during August
2014, and is operating well within the agreed operational parameters and will
result in savings in energy consumption to the tune of 30% to 40%.

Company has also replaced the old Caustic Concentration plant with a new
Plant and this was commissioned in the month of March 2015. This will also
result in improved operational efficiencies.

ii) Ongoing Expansion Plans to drive Revenue
Growth & Profitability

Company awaits the statutory clearances for its expansion plans
and a favourable decision on its appeal before the National Green Tribunal. Company
has also made plans for venturing into newer areas for Chlorine utilisation.

The Company is in the process of developing 632 acres of salt
fields and the production of salt is expected to commence post completion of
the development activities.

The new Salt fields which were acquired are slated to commence
production shortly. With all these measures, management is confident that
company is poised for a great leap ahead and achieving good results in the
forthcoming years.

Net profit of Chemfab Alkalis declined 51.69% to Rs 1.57 crore in
the quarter ended June 2015 as against Rs 3.25 crore during the previous
quarter ended June 2014. Sales declined 25.78% to Rs 22.92 crore in the quarter
ended June 2015 as against Rs 30.88 crore during the previous quarter ended
June 2014.

Net profit of Chemfab Alkalis declined 6.08% to Rs 1.39 crore in
the quarter ended March 2015 as against Rs 1.48 crore during the previous
quarter ended March 2014. Sales rose 4.83% to Rs 25.60 crore in the quarter
ended March 2015 as against Rs 24.42 crore during the previous quarter ended
March 2014.

For the full year, net profit declined 37.81% to Rs
10.23 crore in the year ended March 2015 as against Rs 16.45 crore during the
previous year ended March 2014. Sales declined 1.97% to Rs 109.85 crore in the
year ended March 2015 as against Rs 112.06 crore during the previous year ended
March 2014.

Company performance was impacted in FY
2014-15 mainly due to the fall in international caustic prices which averaged
during the year between USD 320 – 340 per MT CIF. However, we believe that
international caustic prices will remain in the range of USD 350-380 per MT CIF
in the short term which will have a positive impact on company’s realizations.

Moreover, we believe company to post significant improvement in
operating margins considering replacement of old caustic concentration plant
with a new plant which was commissioned in the month of March 2015.

4. Peer Group Comparison:

5. Key Concerns & Risks:i) The Rupee depreciation during the year will make imports cheaper,
resulting in increased flow of caustic soda imports into the country thereby
impacting company’s product realizations.ii) International caustic prices were at USD 330-380 per MT CIF levels
during the year and are expected to remain in this band in the short to medium
term, any drop in prices below USD 330 will have a negative impact on company’s
realizations. On the chlorine utilization front, slow demand growth continued
to have an adverse impact on the Industry.iii) Dependence on the grid power continues to be a risk though the
Puducherry power scenario remains reasonably stable but with the cost of power
continuing to be a concern. The Company is working with the Puducherry Government
for the implementation of open access which would help de-risk our power
sourcing.6. Saral Gyan Recommendation:

(as on 06 Sept'15)i) Chlor-Alkali is the basic Heavy
Chemical Industry, manufacturing Caustic Soda, with Chlorine, Hydrogen, Sodium
Hypo Chlorate and Hydro Chloric Acid as by-products. Overall, the Financial
Year 2014-15 was an average year for the Industry, primarily due to the fall in
international caustic prices which averaged during the year between USD 320 –
340 per MT CIF. International caustic prices have now moved to USD 360-380 per
MT CIF levels and are expected to remain in this band in the medium term which
will have a positive impact on company’s realizations.ii) Caustic Soda finds
major application in diverse industries, such as soap & detergents, pulp
& paper and textile processing among others. Chlorine is produced as a
by-product during caustic soda production and is widely used during PVC
manufacturing, drinking water disinfection and pharmaceutical production. With the rebound in the country’s GDP, the demand for caustic is
likely to grow strong which will help company to boost its revenue growth with
higher capacity utilization. However, slower chlorine demand is expected to
continue to impact the capacity utilisation of the company.iii) In 2014, company introduced new BiTAC®
Electrolysers from CEC, Japan for the first time in the country. The new Plant
was commissioned during August 2014, and is expected to result in savings in
energy consumption to the tune of 30% to 40%. Company has also replaced its old
caustic concentration plant with a new plant which was commissioned in Mar’15.
These initiatives will help company to improve its profit margins significantly
with increase in revenues going forward.iv) With the rebound in the country’s GDP,
the demand for caustic is likely to grow strong. However, slower chlorine
demand is expected to continue to impact the capacity utilisation of the
industry. The investments and efforts taken by the Company during last
financial year are expected to result in significant savings in its manufacturing
costs, especially power cost.v) Company’s EBITDA and PAT margins are
expected to improve significantly considering investments and efforts taken by
the Company during last financial year which will result in significant savings
in its manufacturing costs, especially power cost.

vi) Chemfab Alkalis is
virtually debt free with reserves of Rs. 125 crores in its books which is much
more than the company’s current market capital of Rs. 87 crores. Promoter’s
shareholding is at 75% without pledging any shares and rest is held by
non-institutional investors. FII and DII shareholding is nil in the company.vii) Company awaits the statutory clearances for its expansion plans
and a favourable decision on its appeal before the National Green Tribunal.
Company has also made plans for venturing into newer areas for Chlorine
utilisation. The new Salt fields which were acquired are slated to commence
production shortly. With all these measures, management is confident that
company is poised for a great leap ahead and achieving good results in the
forthcoming years.viii) Management has rewarded shareholders by paying regular dividend in
the past. For FY 14-15, company has declared dividend of Rs. 1.25 per share.ix) As per our estimates, Chemfab Alkalis Ltd can deliver bottom line
of 13.5 crores for full financial year 2016, annualized EPS of Rs. 14.7 with
forward P/E ratio of 6.4X for FY16. Valuation looks attractive for a debt free
company with expected expansion in its profit margins.x) On
equity of Rs. 4.59 crore, the estimated annualized EPS for FY 15-16 works out
to Rs. 14.7 and the Book Value per share is Rs. 142.86. At current market price
of Rs. 94.40, stock price to book value is 0.66.Considering recent initiatives taken by the management in terms of
improving operational efficiencies and company’s expansion plans to drive
business growth, Saral Gyan
team recommends “Buy” on Chemfab Alkalis
Ltd at current market price of Rs. 94.40 for
target of Rs. 170 over a period of 12 to 24 months.Buying Strategy:

70% at current market price of 94.40

30% at price range of 82-85 (in case of correction in stock price in near term)

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